UK GDP Is Expected to Grow 1.4% This Year Despite Weaker Employment

Goldman Sachs Research expects “another mixed year for the UK economy” in 2026, according to a report by Senior UK Economist James Moberly and Chief European Economist Jari Stehn. The team forecasts the UK economy will grow 1.4% Q4/Q4 this year, up from around 1% in 2025.

Our economists predict that the labor market will keep weakening, but they also anticipate a boost to the economy from a significant cooling of inflation and further rate cuts from the Bank of England (BoE).

What’s the outlook for UK employment and consumer spending?

The UK labor market weakened significantly in 2025 as slow economic growth and the increase in national insurance contributions weighed on employment. A recent rise in layoffs points to “further labor market softening ahead,” according to Moberly and Stehn.

Goldman Sachs Research expects the unemployment rate to rise to 5.3% by March. But “as growth picks up towards potential, we see the unemployment rate stabilizing for the remainder of 2026,” Moberly and Stehn write in the report, which is dated January 6.

Given rising slack in the job market, lower headline inflation, and a smaller increase in the national living wage, our economists expect wage growth to normalize this year. Private sector regular pay growth slowed to 3.8% from around 6% over the last 12 months, and the team forecasts further cooling to 3.1% by the end of 2026.

Consumer spending in the UK is low, and the household savings rate is elevated. “Real disposable income growth is likely to remain weak in coming quarters given wage growth moderation, elevated mortgage rates, and a larger fiscal drag on household incomes,” Moberly and Stehn write.

The team’s models suggest that the savings rate will likely decline this year as interest rates fall and consumption catches up with recent increases in real inflation-adjusted incomes.

In total, our economists expect consumption to grow at 1.3% in 2026 (on a fourth quarter, year over year basis), versus 0.7% last year.

What’s the forecast for inflation in the UK?

Inflation was stronger than expected in 2025, and services inflation remained high at 4.4% in November. However, Moberly and Stehn point out that measures of underlying services inflation have made progress recently, with the sequential pace of services inflation excluding volatile items, regulated prices, rents, and package holidays dropping to 3.3%.

The team anticipates further progress on inflation in the coming months given unwinding base effects (distortions in inflation measures from comparing current readings with unusually high figures from the prior year) as well as a cut in household energy bills and the potential for weaker private rent inflation.

Goldman Sachs Research projects services inflation will slow “significantly” this year, and forecasts headline inflation to decelerate to 2.1% in the second quarter of 2026.

Will the BoE cut rates in 2026?

When it comes to BoE rate cuts, Moberly and Stehn write, “our forecasts imply further slack emerging in the labor market this year at the same time that inflationary pressures are fading. We think this will allow the Monetary Policy Committee (MPC) to normalize policy towards a more neutral level.”

The team estimates the neutral rate—the theoretical short-term interest rate where monetary policy is neither stimulating nor restricting the economy—to be around 3%.

Goldman Sachs Research’s simulations and models “point to steady cuts ahead,” Moberly and Stehn write.

Our economists forecast three further 25 basis-point cuts this year, bringing the BoE’s key policy rate to a 3% terminal rate.

What challenges does the UK economy face?

The fiscal trajectory, political risk, and efforts to boost economic growth are likely to be key areas of focus this year, according to Goldman Sachs Research.

“Our analysis suggests that the UK’s fiscal position looks less vulnerable than some other European countries, notably France,” Moberly and Stehn write. They find that markets penalize UK government bonds excessively compared with the fundamentals of the UK economy. Our strategists expect 10-year gilt yields to decline to 4% by the end of 2026 (from 4.5% on January 7).

After the Office of Budget Responsibility downgraded its forecasts for productivity growth last year, government efforts to boost growth are also likely to remain in focus.

The latest economic data point to a recent pick-up in productivity growth (based on payrolls data rather than the less reliable Labour Force Survey figures). However, “the underlying growth trend remains sluggish, even if some of the slowdown in the past 15 years probably reflects the lasting effects of the financial crisis and Brexit on potential supply,” Moberly and Stehn write.

The government’s efforts to boost the supply side of the economy this year are likely to focus on raising labour force participation (especially among young people), further reforms to the planning system, and improving the trading relationship with the EU.

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